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Changes in Growth Potential and Endogenous Technology Diffusion as Sources of Output and Asset Price Fluctuations

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  • Mark Gertler

    (NYU)

  • Ana Mara Santacru

    (NYU)

  • Diego Comin

    (HBS)

Abstract

We develop a model in which innovations in an economy's growth potential are an important driving force of the business cycle. The framework shares the emphasis of the recent "new shock" literature on revisions of beliefs about the future as a source of fluctuations, but differs by tieing these beliefs to fundamentals of the evolution of the technology frontier. An important feature of the model is that the process of moving to the frontier involves costly technology adoption. In this way, news of improved growth potential has a positive effect on current hours. As we show, the model also has reasonable implications for stock prices. We estimate our model for data post-1984 and show that the innovations shock accounts for nearly a third of the variation in output at business cycle frequencies. The estimated model also accounts reasonably well for the large gyration in stock prices over this period. Finally, the endogenous adoption mechanism plays a significant role in amplifying other shocks.

Suggested Citation

  • Mark Gertler & Ana Mara Santacru & Diego Comin, 2009. "Changes in Growth Potential and Endogenous Technology Diffusion as Sources of Output and Asset Price Fluctuations," 2009 Meeting Papers 158, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:158
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    Cited by:

    1. Eusepi, Stefano & Preston, Bruce, 2015. "Consumption heterogeneity, employment dynamics and macroeconomic co-movement," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 13-32.
    2. Stefano Eusepi & Bruce Preston, 2009. "Labor Supply Heterogeneity and Macroeconomic Co-movement," NBER Working Papers 15561, National Bureau of Economic Research, Inc.

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